#3Sig-menu(performance)

Investing Strategies

This page shows the performance of investing strategies I recommend in The 3% Signal, and The Neatest Little Guide to Stock Market Investing, and The Kelly Letter.

The 3% Signal

Congratulations! You just found the stock market’s new best practice.

The 3% Signal plan (3Sig), explained briefly on page 119 of the 2013 edition of The Neatest Little Guide to Stock Market Investing, and thoroughly in my 2015 book The 3% Signal, achieves steady 3-percent quarterly growth in a small-company stock fund by skimming off excess quarterly profit into a safe fund that’s later used to make up shortfalls in weak quarters. This action, using the unperturbed clarity of prices alone, automates the investment masterstroke of buying low and selling high — with no z-val interference of any kind.

In Chapter 7 of The 3% Signal, readers follow three 401(k) investors at the same company, all earning the same salary and making the same monthly contributions to their plans. The only difference is what they do with their contributions. One of them, Mark, runs the signal plan and greatly outpaces his peers. Below are the annual returns of his plan, 3Sig, compared with dollar-cost averaging (DCA) his same contributions into two other investing plans.

Note that one of 3Sig’s primary benefits is the quarterly guidance it provides, which makes an investor more likely to stick with the plan through rough patches. DCA plans do not offer this, so most investors bail at the bottom. Also, because of high volatility that results from focusing an entire DCA plan on a single stock index fund as shown in the S&P 500 (SPY) plan below, almost all investors in the real world diversify their DCA plans across several different types of funds, most of which underperform the raw stock index represented here by SPY. Therefore, in the real world, 3Sig’s outperformance will be much higher than shown in the table below against a perfectly executed DCA plan using a raw stock index.

Finally, in Mark’s 3Sig, Mark skipped the call to add more cash in Q109, which crimped his performance. (See “March 2009” on page 263 of The 3% Signal for the story.) Therefore, this plan does not show 3Sig’s maximum performance potential, which is realized only when all calls for new cash are met. I use it here nonetheless because I believe few people run any investment plan perfectly and that Mark’s decisions closely match what other people would have done in those extreme times. Even so, you can see his plan beating other plans which themselves achieve better performance than most portfolios assembled and managed by supposed pros.

In sum: The table below pits an imperfect 3Sig implementation against perfectly executed DCA plans — one of which is run at the highest performance allocation — and 3Sig still comes out ahead. It will do the same for you.

Here are the three plans explained:

Mark’s 3Sig: Mark’s plan run with IJR and VFIIX as shown in the book, beginning at the end of the fourth quarter of 2000 with $10,000 and the salary history shown in the book, then his salary increasing 3 percent annually in the years after 2013 (where tracking ends in the book). His quarterly contribution to VFIIX in 2013 was $1,815; in 2014, $1,871; in 2015, $1,927; in 2016, $1,983; in 2017, $2,043; and in 2018, $2,104. Mark also contributed $13,860 in new cash during the subprime mortgage crash, per the signal’s guidance. Notice the low expense ratios: IJR 0.07%, VFIIX 0.21%

DCA SPY: The same $10,000 invested at the end of 2000 and Mark’s same salary history shown in the book, with the same quarterly contributions after 2013. The only difference is that all capital goes into the S&P 500 as represented by the SPY ETF. This is dollar-cost averaging into SPY with Mark’s quarterly contributions. Mark’s $13,860 in new cash is distributed evenly across the first 50 quarterly contributions (Q101-Q213). Notice the low expense ratio here, too: SPY 0.09%

DCA Medalists: Same as DCA SPY, but using a portfolio of Morningstar medalist actively-managed funds, initially allocated as follows: 30% Longleaf Partners (LLPFX) large-company stock fund, 20% Wasatch Small-Cap Growth (WAAEX) small-company stock fund, 20% Artisan International (ARTIX) international stock fund, and 30% PIMCO Total Return (PTTDX to March 23, 2018 when converted by PIMCO to PTTAX) bond fund. All are featured in the book, and all are still highly-rated. Contributions are divided by the initial allocation percentages; holdings are not rebalanced back to target allocations. Notice the high expense ratios: LLPFX 0.95%, WAAEX 1.20%, ARTIX 1.18%, PTTAX 0.83%

Here’s how the three plans have performed, with all dividends reinvested:

Mark’s 3Sig

DCA SPY

DCA Medalists

End
2018

$363,1683.3% in 2018

$322,6832.2% in 2018

$247,9254.0% in 2018

End
2017

$375,42713.0% in 2017

$329,78025.0% in 2017

$258,20821.0% in 2017

End
2016

$332,09125.2% in 2016

$263,87415.7% in 2016

$213,4249.5% in 2016

End
2015

$265,2652.0% in 2015

$228,1514.9% in 2015

$194,8672.7% in 2015

End
2014

$260,0239.9% in 2014

$217,53017.8% in 2014

$200,3297.1% in 2014

End
2013

$236,51535.7% in 2013

$184,73438.9% in 2013

$187,12225.6% in 2013

End
2012

$174,28219.6% in 2012

$133,01523.7% in 2012

$148,96523.1% in 2012

End
2011

$145,73810.8% in 2011

$107,49910.1% in 2011

$120,9805.8% in 2011

End
2010

$131,57437.8% in 2010

$97,64225.5% in 2010

$114,39523.8% in 2010

End
2009

$95,47036.4% in 2009

$77,83143.7% in 2009

$92,42248.6% in 2009

End
2008

$69,9935.5% in 2008

$54,14728.8% in 2008

$62,19426.5% in 2008

End
2007

$74,09210.7% in 2007

$76,01716.8% in 2007

$84,60019.2% in 2007

End
2006

$66,95724.4% in 2006

$65,06931.7% in 2006

$70,99128.9% in 2006

End
2005

$53,81220.1% in 2005

$49,39222.9% in 2005

$55,07622.4% in 2005

End
2004

$44,80937.3% in 2004

$40,18334.6% in 2004

$44,98430.7% in 2004

End
2003

$32,63466.5% in 2003

$29,84870.8% in 2003

$34,43058.2% in 2003

End
2002

$19,60420.9% in 2002

$17,47617.8% in 2002

$21,76226.4% in 2002

End
2001

$16,21662.2% in 2001

$14,83048.3% in 2001

$17,21572.2% in 2001

End
2000

$10,000

$10,000

$10,000

To join others who are following the signal system in The Kelly Letter, please subscribe.

The Neatest Little Guide to Stock Market Investing

The 3% Signal, Double The Dow, and Maximum Midcap, the permanent portfolios from The Neatest Little Guide to Stock Market Investing, are proven winners. You saw the power of The 3% Signal above. Below, notice the power of Double The Dow and Maximum Midcap on a simple buy-and-hold basis. They perform even better when coupled with dollar-cost averaging, and better still when rebalanced quarterly with the Signal system. The Kelly Letter runs two leveraged Signal plan: 2x midcaps in 6Sig, and 3x the Nasdaq 100 in 9Sig. In the table below, notice the impact of years like 2008 — and the opportunity they present to react intelligently by putting more money to work. The Signal system automates this process.

Please buy the book or subscribe to The Kelly Letter to see how the portfolios work.

Growth of $10,000 (dividends not included):

The Dow
(DIA) Page 124

The 3%
SignalPage 119

Double
The DowPage 132

Maximum
MidcapPage 136

End
2016

$23,47213.5% in 2016

See
Above

$39,39429.9% in 2016

$60,98438.5% in 2016

End
2015

$20,6772.2% in 2015

$30,3274.4% in 2015

$44,0278.6% in 2015

End
2014

$21,1397.6% in 2014

$31,72516.0% in 2014

$48,1487.7% in 2014

End
2013

$19,64929.7% in 2013

$27,34461.6% in 2013

$44,71470.8% in 2013

End
2012

$15,1564.7% in 2012

$16,92317.1% in 2012

$26,18032.5% in 2012

End
2011

$14,4815.4% in 2011

$14,4509.1% in 2011

$19,75413.2% in 2011

End
2010

$13,74111% in 2010

$13,25022% in 2010

$22,76850% in 2010

End
2009

$12,36819% in 2009

$10,83537% in 2009

$15,17366% in 2009

End
2008

$10,40134% in 2008

$7,90563% in 2008

$9,16868% in 2008

End
2007

$15,7526% in 2007

$21,0977% in 2007

$28,4956% in 2007

End
2006

$14,80517% in 2006

$19,64229% in 2006

$26,96110% in 2006

End
2005

$12,7101% in 2005

$15,2654% in 2005

$24,41819% in 2005

End
2004

$12,7763% in 2004

$15,9065% in 2004

$20,60429% in 2004

End
2003

$12,42724% in 2003

$15,09451% in 2003

$16,03560% in 2003

End
2002

$10,000

$10,000

$10,000

On page 187, I conclude the 15-year IBM Value Line example with this: “How about a real-life test? Decide now whether you would have held your position or sold it. Then, check IBM’s current price to see how you would have done. To help with your calculations, write down that IBM was $193 and the S&P 500 was 1,361 on February 17, 2012. Since then, which performed better?”

This failed wannabe-trader, 72, pensionless, hired a fee-for-service guy to make my portfolios manageable. It worked and I am happy with them, however, I am trying to get into decumulation mode in spite of my need for some excitement. From somewhere 3% sig popped up and I remembered your book was one of the few things I did not dump when I quit trading. Do you have any advice for a Canadian with limited cash who wants to try your 3% sig strategy? Buying the USD is painfully expensive…are there any Canadian vehicles worthy of your strategy? Also watched your YouTubes and would also like to know of any leveraged Canadian ETFs that might be used? Thanks Jason. Going to re-read your book now. Linda

Do you mean capital contributions? To get that, we’d have to add up his salary history as shown in the book and then the additional ones outlined above. The comparison above shows the same “book value” (via capital contributions) used in all three plans, for a level playing field.

How do you take into account the capital you need to inject when the cash flow becomes negative into your return calculation?

The money you make selling the surplus shares may not cover the shares that needs to be bought to get that 3%. I mean fresh money you put in is not to be considered “return.”

When you look at the table in Appendix 3 of your book (The Neatest Little Guide to Stock Market Investing): Capital invested (i.e money that needs to come from your pocket) is actually $15,408 and you end up with $20,402. That is far, far from a 12% yearly return…

If all buy signals are provided with full funding, then the growth rate of the stock fund will proceed at the pace of 3% per quarter. You’re right that in periods when the investor could not fully fund buy signals, the performance would fall back but generally still do better than following media voices advising the sale of stocks during such periods.

It’s important to note that the entire plan (stock fund plus bond fund) was never intended to grow at a predictable pace. The only we can control is the stock fund, by rebalancing to the signal line each quarter, and it’s possible to lose control of that one in extreme periods. One way to address it is with a “bottom buying” account, as explained in my book, The 3% Signal. However, also as shown in the book, even an imperfect implementation of the plan comes out ahead of a full buy-and-hold of the S&P 500 in most time frames.

For a more detailed look at how the 3% signal plan works with a regular inflow of monthly contributions, as is typical in retirement accounts, please refer to the details of Mark’s 3Sig plan on this page. For current performance of my letter’s 3Sig plan, along with its 6Sig and 9Sig plans, please see the charts on the home page.

Yes, all three Sig plans run in the letter — 3Sig, 6Sig, 9Sig — are explained in the user guide, which is always available on the subscriber site. There’s also a discussion forum, where I participate along with long-time subscribers, many of whom can answer questions as well as I can.